Wednesday Jan 09, 2019

Entrepreneur Cognitive Bias: 7 Biases That Kill Startups

An entrepreneur cognitive bias is similar to any other cognitive bias in that it is defined as “a systematic pattern of deviation from norm or rationality in judgment.” At various points throughout the day, most of us are impacted by our own cognitive biases to some degree. While under the influence of cognitive bias, we create our own “subjective social reality” based on our perception of available inputs. In these cases, our constructed social reality—rather than objective input—influences or drives our situational perceptions.

Cognitive biases are often a result of the brain’s attempt to simplify information processing. They are influenced by factors including past experiences, social pressures, internal beliefs, individual motivations, emotions, and even limits on the mind’s ability to process information.

Overall, ordinary human cognitive biases can be either beneficial or problematic, depending on the context and situation. Similarly, an entrepreneur cognitive bias can either facilitate sound decision-making or create unnecessary problems that range from troublesome to destructive. For entrepreneurs, these biases become particularly dangerous when they’re based on erroneous inferences or assumptions. This type of entrepreneurial cognitive bias can get in the way of effective decision-making and in many cases, become startup killing.

Given that entrepreneurs and startup founders are always juggling multiple tasks and engaged in high-risk decision-making every day, it shouldn’t come as a surprise that as a group, entrepreneurs tend to be more susceptible to certain cognitive biases than others. There are several different theories about why entrepreneurs are more susceptible to these biases than some other groups. One theory posits that entrepreneurship attracts persons with certain personality types, while another holds that in general, entrepreneurs—and startup founders in particular—are more inclined to follow their hunches when making business decisions.

Let’s take a closer look at entrepreneur cognitive bias, and 7 biases in particular that can be startup killing:

Optimism Bias: This type of bias causes entrepreneurs to latch on to the “that will never happen to me” mentality. Optimism bias can be dangerous for a startup because it can cause founders to engage in excessively risky decision-making behaviors. Entrepreneurs and founders are particularly susceptible to this bias. The fix: First, accept the fact that as an entrepreneur or founder, you are not exempt from anything. Once you accept that it can happen to you, you’re able to make better decisions for your startup’s future.

Planning Fallacy: Entrepreneurs whose thinking is clouded by the planning fallacy bias generally underestimate the amount of time or resources it takes to create something. This type of bias can kill a startup because it can lead to running out of funding or other resources needed to achieve a critical business milestone. And when critical milestones aren’t hit and a “plan b” isn’t in place, startups can quickly die. The fix: Always consider that things rarely go as planned in life and in the startup world. Analyze all the potential risks and obstacles so you can plan for ways to avoid them. It’s also important to have time, resource and capital buffers or cushions. Be realistic and plan accordingly.

Sunk-Cost Fallacy: When under the sunk-cost fallacy bias, founders are often thinking, “I’ve already come this far, why quit now?” Sometimes, that “never give up” attitude is an asset that ultimately leads to success, but often times, it’s a self-inflicted path to startup destruction. The mindset here is typically “If I just keep up the effort, it’s going to work out like I want.” Unfortunately, that’s not always true and founders waste time and capital pursuing something not worth the effort. The fix: The first step in overcoming this bias is understanding that success isn’t always achievable simply by continuing investments of time, money and resources. Sometimes, founders need to accept that a goal is just not achievable or worth keeping it alive. If things aren’t working out as you had hoped, it can be a signal that it’s time to pivot. To keep the sunk-cost fallacy from killing your startup, be sure to regularly re-evaluate ideas to ensure that the potential payoff or outcome is worth the continued effort.

Overconfidence Bias: This is a well-established bias in which a person’s subjective confidence in his or her judgements is reliably greater than the objective accuracy of those judgements, especially when confidence is relatively high. Founders are often influenced by overconfidence bias when engaging in difficult tasks, when failure is likely or when the founder is not especially skilled in something. The fix: The best fix for overconfidence bias is to know your own limitations. In other words, “Know what you know, and know what you don’t know.” When you don’t have the proper skills or knowledge yourself, find or hire someone who does.

Status Quo Bias: This bias refers to a preference for the current state of affairs. The danger of status quo bias is that it can keep founders from taking action. It’s good to be rational when making important decisions but sometimes, being stuck in the present and afraid to take action, can be a sure-fire startup killer. The fix: Be aware of your own fears by inventorying them and understanding their influence on your decision-making, especially in cases where fear may be causing you to resist change and cling to a familiar situation without rational justification.

Confirmation Bias: This entrepreneur cognitive bias is the tendency to search for or interpret information in a way that confirms one’s preconceptions. Confirmation bias causes founders to latch onto information–no matter how tenuous–that confirms pre-existing beliefs and dismisses naysayers or negative information. This bias can lead to the death of a startup by causing the founder to ignore critically-important information. The fix: Always be aware of your own biases in the context of your decision-making processes. As an entrepreneur or founder, you should embrace criticisms and negative information so you can use it to make your idea stronger and more likely to be successful.

Hindsight Bias: This one is often referred to as the “I-knew-it-all-along” effect, which is the inclination to see past events as being predictable. This can be a startup killer because it can cause memory distortion and lead to false theoretical outcomes. It’s also problematic because it impairs rational thinking and interferes with the ability to learn from experiences, including past mistakes. The fix: Carefully analyze all the factors that influenced past events and don’t solely rely on your own interpretation.

One of the best approaches to keeping an entrepreneur cognitive bias from killing your startup is to discuss important decisions with trusted, objective–and knowledgeable–third parties.

Ideally, before making any important decision that can have a big impact on your startup’s success, you should have someone play the role of “devil’s advocate” or contrarian. And even if you don’t like what they may have to say, always respect their point of view and focus on critical thinking.

When looking at entrepreneur cognitive bias, the founders most at risk are those who don’t realize that baked-in processes are driving them to poor decision-making that can put their startup at risk of failure. As a founder, you should be aware of entrepreneur cognitive bias and have the knowledge and courage to take the steps necessary to correct for bias. Taking these steps will help ensure that as a founder, you are engaging in a sound, logic-based decision-making processes.

Ron Flavin is a growth and funding strategist who helps entrepreneurs and organizations to develop innovative growth strategies, identify new revenue sources or secure the funds they need to grow and prosper. Using his own unique methodology, he work with his clients to develop a step-by-step growth and funding action plan that builds a bridge between vision and financial goals. Using this model, he has obtained more than $200 million in funding for his clients, and been part of decision-making teams that have allocated more than $1 billion in funding. As a result, Ron knows first-hand what those who hold the purse strings look for when determining which proposals get funded and which ones get tossed aside.

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